Under a purely economic driven model, all sales operations seek to maximize profits. Many activities occurring in the normal stream of commerce can reduce profit margins or prevent increases in revenue. These activities are collectively referred to as revenue limitations, and these limitations are also called “shrink” because they shrink revenues or profit.
Revenue limitations, or shrink, can result from product loss, spoilage, obsolescence, expiration, recall, theft, fraud, damage, and destruction. All of these types of activities shrink profits and revenues in any sales operation, and revenue limitations impact profits at all levels of retail operations. Manufacturers, distributors, wholesalers, and retailers share many of these business losses.
Most of these limitations are viewed as unavoidable because implementing sufficient managerial oversight to reduce shrinkage is impractical or not cost effective. That is, the projected costs associated with reducing this shrink (or loss) outweigh the expected benefits. In 2002, revenue limitations (or shrink) accounted for $31 billion in lost revenue in the United States retail industry. Accordingly, even a modest reduction in revenue shrinkage could offer a significant increase in profitability.
As an example of shrinkage, a particular retail product may be discontinued because of the new introduction of a replacement product. Under most present practices at a retail location, the discontinued product would simply be discarded even though the product is in a good condition for sale. Discarding such a discontinued product is considered a loss for accounting purposes. However, if the discontinued product were instead donated to a charity, it could be accounted for as a tax-deductible donation offsetting the loss in retail sale of the discontinued product. Or, the product might still be marketable at another retail operation specializing in the sale of discontinued items. In that later circumstance, the discontinued product may be sold to the “seconds” store for some profit realization (over the Internet on a website). Without adequate management and direction over the disposition decision, however, many businesses simply choose the simplest manner of handling such discontinued product—that is, by putting it in a trash dumpster. As such, what is needed is an improved system for tracking product inventory, identifying alternate dispositions for inventory, and providing direction on the disposition of certain product inventory.
Bar codes were originally developed in the 1950s, and bar codes are currently used as an increasingly important source of data acquisition in the retail industry. Virtually every retail operation utilizes some form of bar coding, and bar coding is emerging as a viable means for identifying and tracking product from point of manufacture to point of sale. Bar codes, however, are not known to be used to account for product items disposed by a retail operation in the situation of a discontinued product, obsolete product, or out-dated product.
A number of bar code options are available. The most prevalent bar code standard remains one-dimensional bar code symbologies. One-dimensional bar coding is well established, but it suffers from a limited data capacity of approximately 50 characters. A more advanced option is two-dimensional (2D) bar code symbology that includes stacked and matrix codes. Stacked codes feature a linear bar code with a capacity of approximately 2000 characters. Matrix coding uses patterns of cells of varying shapes offering higher data density to that of stacked codes but remains approximately a 2000 character maximum capacity. A newly emerging class of coding, composite codes, features both linear bar and matrix symbol coding and is very useful where different parts of the information may be required at different points in the product's life. Composite codes feature both a linear symbol code (e.g. a stacked code) and a matrix symbol code that packs in more encoded data, such as batch or lot identifiers and manufacturing dates.
An emerging technology that may replace bar codes is radio frequency identification tagging (RFID). Similar to anti-theft tags, RFID works using a small chip broadcasting a radio frequency signal in response to a query signal from a data collection device. While still cost prohibitive, RFIDs may emerge as a new source of data acquisition for information currently found on products in bar code format.
The most overriding weakness regarding control of shrinkage is a lack of management control. There are few, if any, management mechanisms that support tracking and control of product loss, spillage, fraud, obsolescence, destruction, and damage. While theft is one revenue limitation that the retail industry attempts to track and control, other areas of revenue limitations (or shrink) have historically seen little specific attention for tracking and management. Effective management control for destroyed, discontinued, recalled, or expired product is needed. An efficient, economical management tool for monitoring, tracking, and controlling retail product from point of manufacturing and distribution to the retail store level would solve this outstanding need, thereby increasing revenue or profit of retail operations.